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Inflation and the service sector

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In this speech,(1) Professor Tim Besley,(2) member of the Monetary Policy Committee (MPC), discusses
the United Kingdom’s long-term structural shift from manufacturing towards services; whether this
shift is consistent with increasing prosperity and growth for the UK economy; and the implications
for monetary policy. The first key theme of the speech is that what matters is not whether output is
in the form of services or manufacturing — it is the move towards the production of higher value
added activities that enables the UK economy to progress. Second, the speech notes that over the
past ten years we have observed a tendency for consumer services price inflation to run ahead of
consumer goods price inflation — therefore we might reasonably expect inflationary pressure at the
current time to be coming more from the services sector, in part driven by limited spare capacity.
However, changes in overall inflation depend on the balance of demand and supply factors in the
economy as a whole, and hence Tim concludes that the structural shift from the production of
goods to that of services does not bring about an inflationary bias.